Starlight, a Broadway media firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year-end an aging of the accounts receivable produced the following five groupings:
a. Not yet due | $500,000 |
b. 1-30 days past due | 110,000 |
c. 31-60 days past due | 50,000 |
d. 61-90 days past due | 30,000 |
e. Over 90 days past due | 60,000 |
Total | $750,000 |
On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group b. 3 percent: Group c, 10 percent; Group d, 20 percent: and Group e, 50 percent.
The Allowance for Doubtful Accounts before adjustments at December 31 showed a credit balance of $4,700.
Instructions
a. Compute the estimated amount of uncollectible accounts based on the above classification by age groups.
b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount.
c. Assume that on January 18 of the following year. Starlight learned that an account receivable that had originated on August 1 in the amount of $1,600 was worthless because of the bankruptcy of the client. May Flowers. Prepare the journal entry required on January 18 to write off this account.
d. The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest-bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?
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